Hello and welcome to the Nokian Tyres Q&A Conference Call. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question-and-answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present Päivi Antola, SVP, Communications and IR. Please go ahead with your meeting.
Good afternoon and welcome to Nokian Tyres' CEO's 100-day update call. My name is Päivi Antola, and I'm the Head of Investor Relations at Nokian Tyres, and in this call, I have with me, well, obviously, Jukka Moisio, the President and CEO of Nokian Tyres, as well as the company's CFO, Teemu Kangas-Kärki, so Jukka and Teemu, welcome. Jukka, the first 100 days are now behind you, so what are your key observations so far?
Thank you, Päivi. First of all, welcome on my behalf. And indeed, my first 100 days' observations are very favorable. But if I start with some personal notes first, that when I was a young man, I worked at a gas station and learned a lot about tires, and especially in the 1970s, learned about the practical view, how to change tires, and how they perform, and how the consumers think about those products. And then, just last week, I actually have a new car, and our testing team, an R&D team, did some detective work, and they found out that I have competitor tires in my car. So, they took the liberty and opportunity to change into Nokian Hakka Black 2, and I tested them on the highway from Nokia to Helsinki.
I have to say that, of course, the car performed beautifully, and there was a clear difference between the competitor tires and our own tires, so in many ways, I'm very, very pleased that our products perform well, and my new car feels like a completely different car with the new tires, but some of the strengths of Nokian Tyres, I find that our products are good, so they perform well. I also see that we have a good pipeline of innovation, new products coming, not only in passenger tires but also in Heavy Tyres. We have a strong manufacturing know-how, so in terms of modern manufacturing and the capability of what we have, for example, in Russia, in Vsevolozhsk, is really, really strong. Our brand is well-known in the markets and in the segments where we have a historical, traditional, strong position.
Finally, and most importantly, we have a good and strong team. I think that one place where that was visible was our reactions and how we did with the COVID-19 situation. The impact could have been really significant. However, our team reacted well. We did quite significant cost reductions. We made good focus on cash flow. And also, we did very quick decisions to stop manufacturing so that we didn't produce tires into inventory. We shut down our factories, and that maybe reacted not only short-term, which helped the immediate situation of the company improve cash flow, but also long-term impact in the sense that when we go into the third quarter, fourth quarter, and to 2021, inventories are well-managed, and that allows then a good recovery of manufacturing going forward.
This assumes, of course, that the recovery that was visible in the early part of the third quarter and also the latter part of the second quarter continues and that no new impact from COVID in terms of shutdowns and so on will come. However, if they do come, we are well prepared, and we have shown that our team reacts well. So, going forward, our inventories are clean. Our operation is in a good position to run well. It's also clear that in 2020, we have a short-term tactical focus, and that means that the cash flow and cost control is very important, and that is something that the company needs to do in 2020. However, the longer-term strategy, we are comfortable with it right now, but clearly, we need to review that once the market has stabilized. At the stabilization, we will need to see when that happens.
Maybe it's 2021, maybe it's 2022, depending on how the COVID impact will continue. My personal guess is that in 2021, already, there will be an improvement and a clear recovery, and that allows also the revisit of the strategy and the precising of the strategic targets. Right now, top line is key. Selling more tires is important. We have a strong focus on new products and innovation. There are new products in the pipeline, and as I mentioned, both in passenger car tires and also in Heavy Tyres, and when we looked at the historical trend and the current situation, we can say that we have an all-time high number of new product launches that have taken place during the course of this year and also will continue in the remainder of this year and early 2021.
In that sense, we are in a good position that new products come, and then they bring opportunities to increase the top line and also the customer satisfaction in terms of serving various segments where those products are being targeted. More work has to be done. It's clear in distribution, especially in continental Europe and in North America. Commercial marketing actions, promotion actions, etc., will have to be improved, and also convincing customers will have to continue at a higher level, and that means that we need to have an intelligent use of commercial tools, promotional tools, and also the product positioning in the marketplace. In terms of investment situation, the key investments are about to be behind us. Some of the investments will take place, some capital outlays, still minor parts towards the end of this year.
But the U.S. investment, Spain Test Track, Heavy Tyres program, most of that is now behind us. And in fact, it's time to generate cash flow, and it's really important that we get the benefit from these investments. And I am convinced and confident that our capability and our install base now is very strong in manufacturing, and then that most of the work will have to be done in the innovation, new products, targeting new products through new segments, and also in the commercial activities so that we actually mobilize our commercial team, our distribution dealers, to sell our products and make sure that the customers, consumers get them in the appropriate places and point of sales in the coming months and quarters. So that's in a summary where we are, and I believe that in many ways, this is a favorable situation.
We clearly see that the COVID-19 in the early part of the year is a temporary setback. Most companies experience that. Then the recovery comes, and if it continues, then we are in a great position to enjoy the benefits in terms of not having too heavy inventories and also being prepared to run our manufacturing in an efficient way.
Great. And how would you summarize what will change in Nokian Tyres now with you as the company CEO?
I think that we need to put that into perspective of the company also, that in the past years, we've had a number of important initiatives to improve our capacity, capability, and also expand our geographic reach. Now, when these programs are coming to an end, then clearly the focus will move into external. So we need to look at the commercial opportunities, new product launches, because that's the starting point of the revenue plan, that we have the right kind of products, we target the right segments, we have a good distribution, good commercial tools, and promotional programs. So that is very important. Then the investments, we will seek the benefits. So rather than initiating a lot of new programs immediately now, I think that we will focus on the cash flow generation and make sure that the system we have put in place.
Of course, we keep on improving it, and we keep on gaining efficiency, productivity, and all that. But the system we have put in place, it's time for that to deliver, so in terms of revenue plan, new products, and so on, cost efficiency, that is something. But then in terms of capital outlay, we've done a major part of that, and so therefore, we now look to benefit from the actions taken, and so that, of course, is the big thing that changes with the new CEO, but that's mostly dependent on the company timing also.
In terms of how I look at the situation, it is that I'm relatively straightforward, so we focus on selling more tires, operations, and then we also make sure that the company operates in a world-class way in terms of achieving the results so that we have good commercial programs, good innovation, marketing, and also strong administration that supports the achievement. But the important thing is to make sure that the system that is in place delivers.
Thank you. And now, before we open the line for questions from the audience, I will take a couple of questions which have been frequently asked by investors. And even though you said that this is not the time to review the longer-term growth strategy or the financial targets, let's still start with the financial targets. So how do you see Nokian Tyres' financial targets from 2018? Above 5% annual growth and EBIT at the level of 2022, are these realistic?
I think that, first of all, 2018 is a different time compared to 2020. We hope that when we go to 2021, then we start going back to a more normal level. But in terms of having the capability and investments mostly behind us, I think that the growth targets are 5%. So if I say that in 2021, 5% growth is something that we aim to have, I think that everybody will say that, but you were far higher in top line in 2019 and 2018, so that is not a relevant target. And I fully agree. We need to get back to that EUR 1.6 billion type of net sales, and then setting a target to about 5% after that means about 1 million tires per year more.
So we have that kind of a capacity and capability invested in Dayton, and also additionally, we have added capability in Heavy Tyres. So I would say that 5% or higher growth after achieving the level that we had in 2018, 2019 is something that is a good target to aim for. Profitability-wise, so again, 2018, 2019 was a different time compared to where we are right now. And clearly, you saw that our second quarter segment operating profit was about 9%, still higher than our competition. I think that our first and most important aim is to be better than competition. When we look at 20%-22% target level, I think that when we go back to normalized level, it is a good ambition to aim for. Can I say exactly 22%? We need to see how the world will look like after the COVID and the post-COVID period.
But we surely want to be the most profitable tire company, and therefore, we aim high.
And can you comment a bit on the tools, how to support margin rebound in 2021 and beyond?
I think that one of the most important, as we established, that the system is now in place, so we have investments behind us. We surely, again, want to continue the productivity gains and efficiencies and all those and make sure that every day, every quarter, the productivity improves. But then besides that, I think the new products is something that we start the margin improvement and revenue plan. So that is one of the key focus areas because new products always allow also to have a new price point. You try to sell the same and old all the time, so you probably face declining prices and so on. But if you have a good pipeline of new products tailored to market segments, to specific car models or car model categories, so that allows to, excuse me, to have a good price point and good product margin.
Equally important is the strong industrial plan, even though we have the investments behind us, so it doesn't mean that we cannot specialize our factories so that we load the most productive factory first, which is Russia. Then we continue to make sure that our North American factory is in good momentum and good position, and therefore, we see that that is also very cost competitive. So first Russia, then North America, and finally, we have a Nokia factory where we have R&D, specialty tires, and also all kinds of development activities. But also, it's the oldest factory, so in terms of productivity for passenger car tires, there we have the highest cost, and so therefore, Nokia needs to benefit from the Heavy Tyres direction, so adding the investments and volume increase in Heavy Tyres that will keep the competitiveness of Nokia.
Of course, Nokia will have to be more and more Heavy Tyres, so bigger volume that way, and then more specialized products in terms of testing, R&D, technology development, while the big volumes will have to be elsewhere. Sales and commercial excellence is something that we need to put more emphasis on, so promotional tools, new point of sales, distribution, dealer support, and similar things. And that will then help us to move the product. And finally, of course, the cost discipline, so that the cost discipline never goes away, so it's important to pay attention to that.
Then one question we get is the North American strategy. What is the target and the plan to get there? And of course, there is always the question, what will be the margin impact?
Yes. So we are in a ramp-up phase in the Dayton factory right now, and we are about to hire the second shift, so we are able to move into four-day continuous production, and that's part of the ramp-up. So we have two shifts, three shifts, and then we add capacity and expand the capacity. And ultimately, the capability at this point of time with the relatively modest investment is about four million tires. So it takes a while to get there, but our plan is clear that we ramp up and we achieve those targets. How do we make it so? Clearly, the important thing is, again, the product innovation and the product launch is so that we have the right kind of products and right kind of services to the car categories that are important in North America.
In order to achieve that, then we need to have good distribution. So one of the key things what we do right now is that we find more distribution points of sale. So we are approaching about 5,000 this year, and we've added a double-digit percentage growth in terms of points of sale during the course of 2020. In order to make all of them hungry and successful, it's clear that we need to have the right products, and it's equally clear that we need to have the production coming from our North American factory. Because if we long-term continue to supply significant volumes out of Europe or Russia to North America, then obviously, the profitability is not optimized that way. So these are some of the things we do in North America.
Most importantly, of course, to have a relevant product and product offer and equally well to have it available to consumers. And so therefore, all these steps need to take place at the same time.
Let's then shift topics a little bit and talk about capital allocation. What are Nokian Tyres' capital allocation priorities going forward?
I think that we basically, first of all, the capital allocation is such that lots of these investments are ready, and so therefore, the capital will go with smaller pieces into improving efficiency, deep automating the lines, complementing the existing, so that means organic growth. But not a significant piece of capital, so this is more step-by-step improvements and making sure that we get the most out of our installed base and existing system. But there are always things to do, deep automating improvements, and clearly, molds for new products is an important part of the investment plan going forward. Then we look at the M&A opportunities and to the extent we can find value-adding and good return opportunities, we pursue those. And finally, then dividends and share buybacks.
We will not want to build excess liquidity on our balance sheet, so that whatever there's excess liquidity, then we will find a way to return that to shareholders, but it's also important to keep in mind that as we operate in Russia in significant ways, so it's important that our balance sheet is strong enough to tolerate the uncertainty and potential risks that relate to operations in Russia, and historically, we have always had a strong balance sheet. I think that that will continue, but there's no need to build excess liquidity, so to the extent we cannot find good organic growth investment opportunities or M&A opportunities, we will look how we can return that excess liquidity to shareholders, but please be prepared that we want to keep a strong balance sheet for the reasons explained.
Do you want to comment on CapEx this year or next year?
Yes. We had basically the guidance in the early part of the year already that we will reduce from EUR 200 million to about EUR 170 million in 2020. We believe that we might be below that EUR 170 million, and then when we go to 2021, we will be below what we invest in 2020. So there will be a declining expectation of the capital outlay. As I said, the important part is to make sure that we have the molds for new products. At the same time, we want to deepen automation of our current operations and so on. But by and large, the system we have in place is well invested, and so therefore, we don't foresee significant capacity increases to the tune of tens of millions in the immediate future.
But keeping in mind that longer term, of course, we want to make sure that we ramp up the North American operation to a level that is competitive and appropriate for the marketplace in North America.
You already mentioned dividend. Can you comment on the possible additional dividend payment for which the board has the authorization from the AGM?
I think that from the management point of view, the important focus, as mentioned earlier, is on cash flow, working capital, cost efficiency, and so on. So we'll do that part, and we also make sure that we enjoy whatever the recovery there is and make sure that that comes to our top line. But those actions together should allow the board to make a decision about the dividend already this fall, at least at the latest by the next AGM. I expect that they make a decision, but most likely before the year end. What that decision will be, I don't want to speculate, but clearly, the board also understands that if there's a good generation of cash flow and good momentum in the company, then there's also reason to reward the shareholders. But what that reward will be, I cannot speculate.
I don't want to speculate at this point. Our job is to make that possible.
Thank you. And now, operator, we would be ready for questions from the audience, please.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Our first question comes from the line of Akshat Kacker from JP Morgan. Please go ahead.
Thank you for taking my question, and thank you for the prepared remarks as well. Three from my side. The first one on your distribution strategy and the sales network. You did mention a few things that you want to do in North America. Can you comment on what are your initial observations for Europe and what would you like to change in that region? That's the first one. The second one is around your passenger car production capacity. You mentioned that all three factories will play a very important role in your growth story. Can you give us an update on the planned ramp-up of capacity at Dayton over the next few years? How much of the current fixed cost structure support in terms of annual output right now in Dayton? That's the first one on passenger car production capacity.
The second one, if you could, can you quantify the rough amount that you will save in logistics and import duties once you transfer the two million units for the North American market from Russia to the Dayton factory? Those are my three, please. Thank you.
Okay. Thank you for the question. So first of all, about the distribution strategy in Europe, so clearly, we've been present in Europe for a longer time compared to North America. And also, if you then compare to Russia or northern Europe, Scandinavia, so we have a relatively mature distribution network. So there's more work to be done in Europe in order to expand our distribution and support our distributors and dealers in order to make our products available. But to the extent that we would expand that at the same rate as we do in North America, not needed. But clearly, we are looking to expand our distribution in Europe as well. I don't have specific numbers here that how much of new point of sales and so on we are adding, but as I said, in North America, double digit, in Europe, a single digit type.
In PCT, ramp-up of the Dayton factory, so we basically go to two shifts now. We expect that when we go to three shifts and before we make an investment, we are about 2 million tires, and then we make some additional small investments, and then we go up to 4 million. And that's essentially our immediate plan. So one shift, two shifts, three shifts, and a little bit additional investments, and then we are at about 4 million, which is then the minimum efficient scale of the factory. Then we have space to add more when that time comes, but this is the immediate one. And in the immediate one, we talk about the strategy type of a period, so three to four years. And logistics and the cost savings in terms of shifting from Europe to North America, I don't have a specific number here.
I'm sorry about that, and we can look at that later on, but at this point of time, I don't have that number to give.
Thank you for that. Can I confirm you said some additional investments to expand to the four million capacity? Can we have a rough amount that you're thinking about?
Yeah. In three to four years, we talk about double-digit million numbers, which are not close to 100 and which are not close to zero or 10. So you can take maybe the average point.
Thank you.
The next question comes from the line of Pasi Väisänen from Nordea. Please go ahead.
Great. Thanks. This is Pasi Väisänen from Nordea Bank. Well, indeed, if I hear right, you actually said that you will increase the amount of partners and/or increase the points of sale in Nokian Tyres. So is this actually going to lead to increased marketing expenses, and is there a chance that you actually are going to face a declining price point by trying to take market share from the competitors? And secondly, what is actually the price point? Could you actually highlight something from the U.S. factory or from Dayton in terms of kind of sales volumes you are currently making? And lastly, I mean, of course, the Russian situation, what's the most recent inventory situation in Russian sales channels as you have actually seen it in August, September? Thanks.
Yeah. Okay. Why don't we start with the Russian comments? So we said already in connection of the quarter two that we had a plan in 2020 to go back to normalized level at the end of the year, and we are basically pursuing that plan so that we expect that by the end of this year, our Russian is back to normalized level at 2019 to 2021, then we can run production and sell-in at the expected market level. Obviously, the sell-out continues normally at this point in time, but our sell-in is lower. On purpose, we reduce our sell-in in quarter two to reduce the sell-in in the pipeline. When it comes to North America, yes, we are expanding our network. We are hiring, recruiting more distributors and dealers.
I think the more important thing rather than going into price is the launch of new products because a big part of this that we actually get into bigger distribution and more dealers in North America is that we have new products. Actually, this is one of the things that we need to do internally is to develop and make sure that we have the appropriate product offering. And as we have historically, we have historically been in North America mostly in the winter tire, studded winter tire, and often New England and Canada states. Now, when we have other products and segments, then it's important in this time in products and innovations in that sense. So how that plays out in terms of what commercial tools, what marketing programs, promotional programs, e-commerce, etc., what tools will be used, we have to then work step by step.
It's normal in North America that you have this gross to net and in between you have various commercial tools and promotions, and we will use those in an intelligent way. We believe also that in combination with new products and localized manufacturing, that in terms of making money, that total picture is still attractive to us, then how about the net sales prices in North America right now? We don't really have any specific comment on those.
Just to remind all of you, our Capital Markets Day presentation from 2018, where you can see the relative net ASP level compared with the PCT average.
Thanks. That's clear. But just to kind of cross-check, could you actually repeat what is the most recent break-even date assumption for the Dayton plant currently?
Break-even assumption?
In terms of kind of a month or year.
Okay. When we start seeing the profitability that is attractive and so on, we need to go about 3 million tires. We believe that 3 million tires can be achieved, what do you think, in two and a half, three years, something like that. Then we see a profitability that is not hampering or hindering the company performance in any shape or form.
Okay. Thanks. That's clear from my side. Thanks.
The next question comes from the line of Henning Cosman from HSBC. Please go ahead.
Yeah. Thank you very much for taking my question. Just on that last point, actually, can I just clarify that you're saying in three years, when you reach three million tires, that the U.S. will not be dilutive to what you then want margin level for the company to be 18%-20%? Is that what you're saying?
What I'm saying is that when we get to a point that we actually focus the production because this is the whole production system now. It's not only one factory. So we need to start from the point of view that, first of all, first we load the Russian factory, then we load to the maximum capability North American factory. We will have a swing in passenger tires in Nokia, and then we drive a higher volume of Heavy Tyres in Nokia so that the mixing department obviously sells more volume through Heavy Tyres and less through passenger tires. And this whole system allows us to get to a level that, as we earlier commented, that is 20% EBITDA, a reasonable target going forward.
Yes, when we go beyond or to the next after this COVID-19 time, and when we start looking at the targets, then 20% is a relative target. But it's not only one factory. It's a whole system because we have a system-wide plan for the manufacturing and the industrial plan. This is important that the industrial plan is strong and supports then making the company-wide margins good.
Yeah. That's understood. Yeah. Thank you.
And building on this roughly three million level in Dayton, that is the level where we see that we are then finishing these non-IFRS exclusions from the Dayton factory. So we will be then more on a normal level at the Dayton factory.
Yeah. Exactly. Because it sort of leads me to my actual question, which was when Päivi asked you about the tools for the profitability improvement, you said that it's mainly the investments being behind you. But doesn't that also mean that the DNA is now starting to kick in as far as P&L profitability is concerned for the U.S. and so on? And I imagine it's still true that the U.S. is in tendency rather dilutive as compared to the Russian factory. I mean, it's helpful that you're talking about that 20% ambition in three years' time, let's say, but if you could just put that in context again with the DNA and the structurally dilutive character of the U.S. vis-à-vis Russia.
Yeah, and therefore it's important that we get the full utilization or as high utilization as possible in North America with new products and so on, but you are right. Of course, the DNA will kick in. At the same time, if you go into a situation now that the capital outlay this year, next year, and the year after will be relatively modest, so we also win some of that DNA back because the investment plans in the immediate two to three years will be relatively, let's say, subdued because we are quite well set for the volume growth and quite well set for the immediate future.
Sure. And the other question was about your review to the strategy. Once you see a market normalization, can I just ask you along what dimensions you would want to review the strategy? Because I would imagine it's relatively simple. You just basically try and refill the existing capacity as quickly as possible, and beyond that, you add step-by-step capacity for organic growth. So maybe you can just share with us a little bit what sort of dimensions you're thinking of when you're thinking about a midterm review of the strategy.
Maybe it's simply that. I mean, you hit the nail. It's exactly that we will look into the situation that how the recovery comes, what kind of market segments are evolving, where can we play our know-how best, and then direct the company accordingly. And I'm not saying that the fundamental strategy of being a growth company, selling the capacity, and targeting the attractive markets is not going to change, but what's in it then will have to be detailed. But maybe I think that that's enough.
Yeah. And very lastly, if you don't mind, on the dividend again, I mean, Päivi again asked that in a way, but is it fair to say that I mean, you commented that you basically see the momentum and the liquidity level going in the right direction, and it's therefore also fair to reward the shareholders, but maybe more for next year and beyond that. You're not really thinking of a lower absolute dividend level than what we've seen in, say, 2018, 2019. It's rather that level or above. Is that fair to think about?
I think that this is something that I cannot speculate on behalf of the board. So we need to see how the momentum continues and what's the comfort level of the decision-makers in the company. Obviously, for the management, the important thing is to deliver the cash flow and deliver the turnaround and the momentum in top line.
Understood. Thank you very much.
The next question comes from the line of Thomas Besson from Kepler Cheuvreux. Please go ahead.
Thank you. Hi. It's Thomas Besson. Thanks for the comments. I have a few. I just want one, please. Can you help us assessing where is currently your minimum CapEx levels? So you say you're going to drop probably below EUR 150 million, go lower next year. I mean, before Dayton, I think the maintenance CapEx level was close to EUR 100 million. Should we assume that with Dayton and the additional EUR 50 million investments coming, the maintenance CapEx is somewhere between EUR 120 million and EUR 150 million? And that's something where we should be the direction we should be thinking about for possibly 2021 and eventually 2022?
So if you look back, the CapEx level, the normal CapEx level has been on the level of 100 and 120. And now when we have then a new factory in place and additional NPD pipeline, so you could assume a couple of tens of millions on top of that.
So 125, 150 doesn't shock you then?
Yeah. You are pretty much on the range. Yes.
Great. Can you confirm, Jukka, whether the full investments on doubling the capacities for specialty are effectively going to be spent or have been spent, or whether you eventually plan to limit the investment and not go as far as doubling the capacities in specialty or Heavy Tyres?
In Heavy Tyres?
Yes.
Basically, the Heavy Tyres investments are in the. I think it's at the back end of the investment because basically the mixing department is, yeah, two new yeah. Two years. So basically what we have is that in this year we have the Heavy Tyres investments and then next year as well. But then after that, we basically increase more than 50% the output of the Heavy Tyres. Most of the investment is not on the mixing department, but it's on the Heavy Tyres forming department.
Okay. And my question was nothing has changed on that plan. You still plan to increase that capacity that much?
Yes. We plan to increase, and we also plan to direct Nokia volume and especially the mixing department volume more through Heavy Tyres, and then that allows also that we can specialize more on the passenger car tires in Nokia, which then consequently allows then a fully loading of Russia and then calls for fully loading of Dayton as we go along.
Okay. It's also a way to protect the plant in Finland in the long term?
The plant in Finland will be dedicated to Heavy Tyres and will be quite profitable and successful in that, and so it's not protecting anymore. I think it's more to open a new avenue for it.
Securing maybe, I should have said. Okay. Okay. It's very clear. Thank you very much. I have one last question, if I may. You're here, I hope, for this decade or probably a large portion of this decade, I would assume. If you have the choice between having Nokian in 2030 as a 2 billion revenues company with 15% margin or 1.5 billion company with 25% margin and substantially higher returns, which one do you choose if that's something you can decide?
If something that I can decide? Well, I would probably go with a higher top line, and then I would work my ass off to achieve higher margin than 15%. Then I would accept that you give that it's 15%. I would say that, but I don't believe in that. I believe that it can be higher.
Great. If you can do 2 billion in 2025, I sign immediately. Thank you very much.
The next question comes from the line of Victoria Greer from Morgan Stanley. Please go ahead.
Hi there. Yes. Just a couple, please. You said that the sell-out volumes in general were quite strong at the moment. Could you talk a bit about how you were thinking about the longer-term impact of miles traveled being down in 2020, flowing through to replacement demand? Because obviously, there has been, at least in your Q2, quite a strong footfall in the dealerships as people had that seasonal shift back to summer tires. So how are you thinking about that? And then secondly, to ask the question about why you haven't chosen to make bigger strategic changes right now, what are the uncertainties about the market development that are holding you back? Is it just not the right point from a macro perspective to be launching new products? Is it uncertainty about overall demand levels, or is it really about segment mix and how those perform? Thanks.
Okay. So first of all, about the demand. So clearly, the demand is fluctuating a lot. So therefore, ultimately, of course, our volumes are as good as the underlying demand. So there's a lot of fluctuation. So obviously, there are calls by our customers, and then there are delays by our customers about the volumes that they can sell to consumers. And so we need to leave it at that. So far, what we see is that obviously, when the margins even go up and traffic in the major cities and Western Europe, etc., increases, then obviously, we also see the demand recovering. But will that continue is really dependent on what will happen with the lockdowns and so on.
So if there's a hard lockdown, you may remember that in the second quarter conference call, we talked about that, that there may be a 70% decline in miles driven, and that has an impact on the tire demand. We don't see that kind of thing happening right now. So therefore, we expect recovery. Then what will happen with the winter tire market? So still to be seen because obviously, the season will come only in the quarter four. And so therefore, we see what the demand there is. Why not bigger strategic changes at this point of time? I think that this is a time that many things in the company are coming to place in terms of investments and ideas that we have been put in place. So it's important to focus on the fact that we make them deliver.
If you make major strategic changes or shifts at a time when you actually expect the system to deliver, then you risk that because the demand and the environment is quite fragile, and there's a more stronger momentum, then we can, of course, look at the potential changes that need to be made, but at this point of time, I'm quite confident that what we have in place, the new product pipeline and the recovery and the opportunity to sell more and make more money, I think that that's within our reach, so we should really grab that because it's right there right now.
Great. Thank you.
The next question comes from the line of Panu Laitinmäki from Danske Bank. Please go ahead.
Yes. Thank you. I have three questions. Two, on the new products. You spoke a lot about the need for new products to drive sales, and you mentioned a good pipeline for new products. So first question, can you tell a bit more what is coming and into which regions and what kind of impact do you expect that to have on the business? Second question is that do you expect the need for new products to result in a need to increase the R&D expenses? And then third question is on Russia and basically on the factory capacity utilization. Would you consider going to the C-segment in Russia to keep up the kind of capacity utilization, or are you confident that you can grow your market share in other regions to kind of fully load your factories? Thanks.
Yeah. Okay. Let's start with Russia again because that's something that is important. So in Russia, no C-segment that we will not manufacture C-segment. We think that we can load the Russian factory with A and B and to the extent that we have capacity, then we supply that outside Russia. So that will be our and that is our most efficient factory and very important in terms of the company system. So therefore, it also needs to have the best product range in terms of making the best money. Need to increase R&D. Yeah. I think that this is something that we will, in part of our investment plan, we will invest in more molds and so on.
Even though the total investment amount and CapEx will go down, the mold investment will probably go up because we have new product launches, and those will happen, of course, in our Nordic region. There will be new products coming. I don't want to disclose what products and when, but they are. Also, we are doing Continental European or Central European, like Seasonp roof was launched on the 2nd of September. Then we have a number of products for North America because obviously, there are segments and targets and end uses where we haven't been present in the past. So we use our know-how, which is based on our traditional historical know-how of premium demanding tires, and we will apply that to supply and design categories for North America. Again, all of those will have to go with the mold investments.
So yes, there will be R&D increases, and there will be investments dedicated rather than investing in hard capacity or walls and equipment. It's investing in molds. And that way, then we move closer to investments, move closer to customer and consumer if you want that way.
Okay. Thanks. Can I have a follow-up on the products? Where do you see kind of the most need for new products? Did you see gaps in the portfolio, or is it more like you just need to improve the existing products all around the regions?
Some of our existing products are becoming dated, so we need to and we want to launch new versions of those. But the big opportunity is, of course, in the product portfolio. We have a gap in our lineup, and in North America, we have a number of gaps. And so therefore, of course, that filling that lineup or filling those gaps step by step is important. But we don't want to remain anyway with our existing products in the Nordics or in Russia. We want to make sure that we remain competitive because the new products really means also a new price point. And the new price point means that the margins can be maintained and restored and improved.
All right. Thank you.
The next question comes from the line of Artem Beletski from SEB. Please go ahead.
Yes. Hi. This is Artem Beletski from SEB. Thank you for taking my questions. So I actually have three to be asked. So first is starting with discussion regarding financial target, and you have been indicating about EBIT margin of roughly 20%. Do you see this potential target, let's say, within a two- to three-year horizon? And maybe could you clarify whether you are talking about reported EBIT margin given the fact that you have some one-offs historically and likely in future? Second question is relating to your distribution strategy, and I have noted that you have sold some Vianor stores in the U.S. So how do you view, so to say, franchise business model compared to ownership on this front, and what is the right way in terms of distribution when it comes to your different brands, what you have out there?
And lastly, on current trading, so you talked about inventory situation and being pretty comfortable about current status. So are you talking about inventory, basically, what you have or also when it comes to inventories, for example, if your dealers in Europe and also North America?
Okay. So first of all, we talk about the segment operating profit, and we hope that we will not have too many one-offs in the future. Obviously, we want to make sure that our EBIT and segment operating profit are getting closer because longer term, if you would have those at very different levels, this is not healthy. So we recognize that, and we understand that as a business people operating a company with non-IFRS exclusions only is not the healthy way. We've seen a number of companies in Finland doing that, and it's not healthy. So we aim to make sure that segment and operating profit are very close to each other. Current trading in terms of inventories, yes, we've reduced and we've worked on our inventories.
Indeed, in the second quarter, we took quite significant downtime in our factories, and that helped us to work on the inventories. Now, what is important to keep in mind is that in the third quarter, we are building, of course, a little bit of inventory for the winter season and so on, but that's normal, and that's part of the way we operate. In the macro picture of our inventories, we are quite comfortable with the inventory level and the working capital level at this point of time. Just paying attention to the fact that this is the time when we get prepared for the season, which is in the latter part of the year. Vianor, Teemu, can you comment on the Vianor and the distribution, please?
Yeah. So regarding your comment of our divestment in the U.S., so we sold 10 stores in the area of Northeast U.S., and we have felt that it's not a strategic asset for us. So we sold these stores to our current trade customers who continue to sell also Nokian Tyres. So in that sense, no dramatic change from our point of view. Then going to the Vianor chain in the Nordics, as you know, it is a vital part of our business in the Nordics to secure the good market position.
Okay. Very clear. And if I maybe can have one follow-up when it comes to current trading. So looking at your Russian factory, so after this kind of quite exceptional first half, are you currently operating close to full speed, or could you provide some comments on this front?
Yeah. We operate at full speed right now.
All right. Great. Thank you. That's all from my side.
And the next question comes from the line of Sascha Gommel from Jefferies. Please go ahead.
Yes. Good afternoon. Thank you for taking my question. I have two follow-ups. First, on the strategy and the strategy review, are you also considering going into direct OE distribution, or is that something you could rule out already today? And then my second question would be on capital allocation again. Maybe firstly, you said you want to keep a healthy balance sheet. Can you quantify that in any way? And then secondly, you said that M&A seems to be a higher priority than returning cash to shareholders. Maybe you can share some views on the M&A side. What's your strategy there, or any indications would be appreciated?
We cannot rule out OE distribution, so we need to look into that, what is really the world after the COVID time. All of those distribution elements that are important and relevant for us to sell our products to customers and consumers will have to be evaluated, and then, of course, the tools and the ways to be chosen accordingly. We have what we have right now, and we improve it, but there will be an opportunity to reinvent and improve the company going forward. The strategy is part of that to look at how do we sell more tires because, as correctly pointed out, that we have invested in the capacity and capability, and how do we move the product. Capital allocation and M&A will look at opportunities.
Obviously, it's important to keep that focus that organic growth as well as M&A or acquired growth will have to bring the returns that are attractive. And to the extent we cannot find and we are not able to develop those projects and so on, we will then return them. But if we do have opportunities, then we start with the organic. We know that we can deliver that, and we just have to identify the right projects and whether they are efficiency gains or complementary or even bigger investments. They have to meet the criteria of returns. M&A, the same applies there. And then finally, the overliquidity is something that if there's really excess money on the balance sheet that is not needed to grow the company or advance the company, then that's so-called overliquidity. And then that we see as ways to return to the shareholders.
I think that the board and everybody will want to do the same because keeping overliquidity beyond having a strong balance sheet in the context of Russian operation is something that no one wants and no one needs.
And how would you quantify that in terms of healthy balance sheet or excess cash? And is it like what metrics should we look at?
Well, I would say that there are different times to assess that. And right now, I think that we have a situation that we need quite a significant liquidity in order to navigate through this COVID period. When we get to the other side of this, then we will also define that more carefully. So that's part of setting the strategic targets and then quantifying that. Right now, I would say that most companies would probably quantify that what sort of liquidity is needed because there may be surprises around the corner, and we'll be prepared for those. And we are keeping a very sound liquidity situation as we speak. But longer term, we will quantify that. I'm sorry that this may not be the right time to do it.
Thank you for the answers.
And the next question comes from the line of Mattias Holmberg from DNB . Please go ahead.
Thank you. Several years ago, I think there was some discussion if Heavy Tyres was big enough from a scale perspective. So now, given where Heavy Tyres stand today with the capacity expansion, I'm curious if, first of all, it even hypothetically, of course, would be possible to separate Heavy Tyres from the rest of the group for sale or a divestment, or if it's sort of too integrated with the mixing or the passenger car tires business, and as a follow-up for that, if you even would consider doing anything with the Heavy Tyres business, such as a sale or a spin-off, or if it's a too importantly strategic asset for you.
I think that we are now in the middle of the investment program. Right now, the important thing is that we implement that, and we achieve the results that we've set out to achieve. That will mean that the capacity and capability will increase. That also means that the Nokian factory, a significant part of Nokian factory, is dedicated to Heavy T yres. Therefore, of course, it becomes a possibility to consider that as an operation with its own factory. Will we then do that? It's something that we look at the margin profile and the opportunity and ambition beyond the immediate Nokian investment, and then see that if there are add-on acquisition type opportunities or market penetration or innovation opportunities, then it would be considered to be an important part of the company. I think that this is the starting point.
At this point of time, we would want very much Nokian Tyres to keep Heavy Tyres while we, of course, develop that into a strong entity based on Nokia factory. Nokia factory significantly is supporting Heavy Tyres and less significantly supporting passenger car tires, except for the innovation and R&D and the technology development.
Thank you.
It's starting to be 4:00 P.M. here in Helsinki, so it's time to finish this conference call. Thank you, everybody, for participating. Thank you, Jukka, and thank you, Teemu.
Thank you, Päivi.
We will be back on the line on the 27th of October with the Q3 results. Thank you all, and have a good day.
Thank you.
This now concludes the conference call. Thank you all for attending. You may now disconnect online.